CHAPTER 1 THE WORLD OF BEEF AND ITS MARKETS Nick Beeby, Meat New Zealand, Wellington Summary New Zealand has 5 million (m) beef cattle and 4.6m dairy cattle including 1.5m beef breeding cows and 3.5m dairy cows (2003). At present, 2.4m adult cattle are slaughtered per year comprising prime steers and heifers, bulls and cull dairy/beef cows. About 83% of cattle slaughtered are sold as export beef. The US beef market and beef price (cycle) dominates beef prices in New Zealand. Of total beef exports, 57% of our returns come from the US market, 14% from Canada, with the remainder coming mainly from sales in North Asia. The exchange rate between the US and New Zealand dollars also has some impact on prices. At present (2003), nearly 65% of New Zealand s beef production is of dairy origin. New Zealand is the sixth largest exporter of beef in the world, behind Australia, the US and Canada in particular. Red meat (and other meats) consumption is driven by convenience and processed products. White meat consumption has risen by meeting consumer needs for convenience foods. Food safety scares see widespread abandonment of affected foods with consumer sensitivity on food safety issues very high and confidence in many food producers low especially in Europe with the recent BSE scare. Consumers prefer leaner healthy meats produced by contented animals. A special feature of New Zealand beef is that it is grass fed, so that it is both lean and also contains elevated levels of conjugated linoleic acids (CLAs) and Omega 3 fatty acids; both recognised as beneficial for human health. Finally, New Zealand promotes its beef as having come from animals grazing outdoors on green pastures. All those involved in the beef industry have a stake in maintaining this marketing image. Introduction The era of land development in New Zealand is now nearly over and so with no more new land available to expand onto, different agricultural enterprises must compete against each other as to who has the rights to enjoy the resource. CHAPTER 1 The World of Beef and its Markets 1
Consequently, farmers are diversifying land resources away from those enterprises perceived to be less profitable to those perceived to be more profitable. Figure 1 is indicative of this activity. Figure 1: Changes in sheep, beef and dairy cattle stock units (1000 s) between the years 1970 and 2002. Source: MWI Economic Service. A recent change has included an increase in the number of finishing cattle that are of dairy origin. This has also seen the size of the New Zealand beef cow herd decline somewhat. In addition, over the last eight years, 1,516 new dairy farms have replaced 3.3 million sheep and beef stock units, including 120,000 breeding cows, due to perceived higher profitability in dairy farming. This has altered the mix of beef types produced by New Zealand so that while in 1994/95, 48% of beef production came from prime beef cattle, by 2003, the figure is closer to 35%. By this time, and further out, cattle originating from the dairy industry are likely to account for around 65% of total beef production. The New Zealand beef industry and drivers of returns an overview Figure 2 provides a summary of both numbers and sources of cattle and their overall market destination. 2 CHAPTER 1 The World of Beef and its Markets
Figure 2: An overview of the New Zealand beef industry in 2002: sources and numbers of cattle and their overall market destination (Adapted from S.T. Morris, Massey University). Figure 2 shows that a very high proportion of New Zealand s beef production is exported. The prices received by New Zealand beef producers are very strongly driven by these returns. Within these forces, other factors such as seasonal supply variations also operate. In Figure 3, it is obvious that the US beef market must have an overriding influence on our beef export returns, with the exchange rate between New Zealand and the US also having some effect. Figure 3: New Zealand s beef export returns for the year 2001-02. Source: MWI Economic Service. CHAPTER 1 The World of Beef and its Markets 3
The US beef cycle A major factor driving world beef prices, and hence the fortunes of New Zealand beef producers, is the US beef cycle. Many agricultural commodities exhibit cycles, that is, some quantifiable characteristic, like size, prices, or numbers, which increase to high levels, reach a peak, decline to a low level, and then repeat the fluctuating pattern. Livestock producers ability to expand or contract in response to market signals is dictated by a biological factor the length of time required to produce new animals for market. The biological component of the poultry cycle is by far the shortest livestock cycle, requiring only about 7 months from the time an egg is fertilised and laid, the chick is old enough to breed and then her offspring reach slaughter weight. In fact, the cycle is shorter than this because many of the above chicks are not required for breeding and can be slaughtered before reaching breeding age. The biological cattle cycle is considerably longer. Approximately 4 years pass between breeding, production of progeny, their growth to breeding age and final production of animals for slaughter. In addition, cattle usually produce only one calf so there are few opportunities for shortcuts as in the poultry industry above. The US beef cycle (Figure 4) is a 7 to 12 year cycle encompassing the expansion and contraction of the US beef herd. In addition, it is affected by other factors such as weather, grain exports, government programs, etc in addition to the biological breeding lag. Figure 4: The US beef cycle showing US beef production (billion lbs left hand axis) and New York Manufacturing Cow price (US right hand axis). 4 CHAPTER 1 The World of Beef and its Markets
The US cattle cycle consists of about 6 to 7 years of expanding cattle numbers, usually followed by 1 to 2 years in which cattle numbers are consolidated, then 3 to 4 years of declining numbers before the next expansion begins. However, economic factors or natural factors can shorten or lengthen the whole cycle, or any of its phases. The periods of time between cyclical peaks or lows in cattle numbers have tended to shorten over time. Trends in the New Zealand beef industry The New Zealand beef cattle herd last peaked in 1995/96 at 1,617,000 breeding cows, falling to 1,4157,000 in 1999/00. With herd rebuilding occurring at present, it is expected to peak again in 2003/04 at 1,524,000 breeding cows; 93,000 head (6%) less that for the previous cycle. However, New Zealand s total beef herd and production (Figure 5) also includes cattle originating from within the dairy industry, which as was shown in Figure 1, has gone through a significant growth phase in recent years. Figure 5: New Zealand beef numbers vs. production (tonnes bone-in) per year. Source: MWI Economic Service. New Zealand beef prices have also followed a cyclical trend (Figure 6). Our beef returns are greatly influenced by global economic conditions and market developments (particularly the US) as described above. These factors influence the position of the New Zealand cattle cycle at any point in time as to whether it is in expansion or contraction mode. Issues likely to affect price prospects include the US beef industry, growth of trading partners, currency movements, market conditions determining supply, and thus trade by major competitors, constraints imposed by protective trade devices such as quotas and tariffs, and the progress of trade policy CHAPTER 1 The World of Beef and its Markets 5
reform. A further important factor affecting meat industry prospects is concern over animal health and food safety, with outbreaks of disease affecting meat demand and the directions of trade in some countries. Figure 6: All beef grades weighted average annual export price trend (c/kg carcass weight at the farm gate). Source: MWI Economic Service. Cattle prices also fluctuate within cycles. In New Zealand, a price structure has developed which follows seasonal pasture availability or production, and increasingly the dairy cull-cow pattern (Figure 7). Figure 7: Steer and Heifer weighted average month and annual price trend; schedule for 245.5 270kg carcass. Source: MWI Economic Service. 6 CHAPTER 1 The World of Beef and its Markets
During the cold winter months in New Zealand, pasture growth is constrained which reduces pasture availability and restricts the growth rate of cattle. Hence, fewer cattle reach suitable weights for processing. Spring (October to December) is typified by high pasture and animal growth rates. Greater volumes of cattle will reach processing weights and be brought forward for slaughter at the end of this period. April to June has the highest slaughter volume of cattle for two reasons: 1. Farmers prefer to carry fewer cattle over the winter when pasture growth slows. However, there are exceptions to this. Parts of New Zealand, especially Northland, can achieve very good winter growth rates for cattle, which can reach killable weights by 15 to 16 months of age, say, in November. 2. The dairy cow-milking season has finished and surplus cows are culled from the dairy herd to make room for young replacements. Composition of New Zealand s beef exports The change in land use, growth in the dairy industry, and the relative profitability of bull beef have all been factors for the changing composition of New Zealand beef exports. The major driver for the conversion to dairy over the last decade has been improved profitability relative to other land-uses and good market prospects. Despite some volatility in world dairy product prices, the fundamentals of the New Zealand dairy industry are such that its future over the long term is promising. Currently (2002), the components of beef product produced in New Zealand are; bobby veal 3%, loin 8%, secondary or prime cuts 30%, ingredient or processing 59%. The growth in the dairy industry has facilitated an increase in the proportion of ingredient beef. At present, the United States and Canada are the only two countries that have significant demand for New Zealand ingredient beef. This means that the increased production caused mostly by the dairy industry, is coming at the expense of product diversification, and is increasing our reliance on two markets in particular. Destination of New Zealand beef exports As described above and shown in Figure 3, North America dominates New Zealand s beef exports. The US accounts for 59% of our beef exports by volume. However, the greater significance of the US market is that it takes around 75% of processing beef exports, and an even higher percentage of bull beef exports. These percentages could be even higher if a quota did not limit access to this market. Returns in this market in New Zealand $ terms are (2003) more attractive than in alternative markets, and New Zealand pasture fed beef is lean and well suited to the ingredients business. However, it is essentially a commodity business, and New Zealand exporters are price takers. CHAPTER 1 The World of Beef and its Markets 7
Demand for New Zealand product in North America is affected by the activity of Australian and South American exporters, though all operate within a quota system. The out-of-quota tariff (26.4%) is a strong disincentive to over supply. In addition, the intensity of competition is exacerbated by the weak supply relationships, common in this market, because of the existence of traders, who generally prevent the development of strong links between exporters and end-users. Imports into Canada are also controlled by a quota system. In addition to country-specific quotas, Canada retains the flexibility to issue supplementary import permits. The third largest importer of New Zealand beef is Japan, and our most important market is Okinawa where New Zealand has an established presence as the major supplier of imported table cuts. New Zealand beef is viewed as an inexpensive alternative to local beef. Our market share has been eroded from 80% (1995) to 55% of product by Australia. New Zealand has a long established position as a supplier of premium loin cuts to the mid-level restaurants throughout East Asia. This position is supported by a value for money perception of New Zealand beef, it being cheaper than Australian and US cuts of an acceptable quality. Size of the International Market World beef trade has increased since the early 1960s, as income growth increased demand for meat products, including beef. World beef trade is now nearly 6 million tonnes. Most beef production, consumption, and trade (Figures 8, 9 and 10) are concentrated in a few countries (including the European Union (EU) as a single country). Nearly 85% of consumption and 90% of production is located in the 13 largest beef-producing countries. Over 55% of the world s beef is produced and consumed in the US, the EU, and Brazil. The US accounts for about 27% of both world production and world consumption. Nearly 90% of the world s beef imports (Figure 9) are concentrated among seven of the 13 largest beef producing countries. However, two of the largest importers Japan and Korea are among the smallest producers of these 13 countries. The US accounts for about 30% of world imports. 8 CHAPTER 1 The World of Beef and its Markets
Figure 8: Global beef consumption (1999 provisional) in tonnes of carcass weight equivalent. Figure 9: Top net Imports of beef by country in 2001. Source: FAPRI, MWI Economic Service. Beef exports (Figure 10) are also highly concentrated, with 10 countries accounting for 95% of the total. However, exports are not highly correlated with production, because of population. CHAPTER 1 The World of Beef and its Markets 9
Figure 10: Top net exports of beef by country in 2001. Source: FAPRI, MWI Economic Service. New Zealand s place in the world market The New Zealand cattle industry is very small on a global scale, accounting for 1% of production and 8% of cross border trade (the EU is regarded as one border). Cattle are predominately grazing animals and so countries with large areas of forage are able to raise larger numbers of cattle. The largest number over 300 million is found in India. Brazil and China have 150 and 125 million respectively, while the US is fourth with 97 million. New Zealand has about 9.6 million cattle (2002) of which 1.5 million are beef breeding cows. An important non-land factor that affects a country s position in world beef trade is the disease status of its cattle. The most serious of the animal diseases are foot and mouth disease (FMD), and bovine spongiform encephalopathy (BSE). FMD and BSE-free status allows exports of fresh/chilled and frozen beef to a greater number of markets. New Zealand has never had a case of either disease. Grass-fed Producers International beef trade is comprised of several sub-markets. Countries that have not developed cattle feed-lotting industries can supply grass-fed and short-fed (grass raised with a limited feeding of grain) beef. Nearly all of New Zealand s beef exports are directed to markets for grass-fed beef, including the US and Asian markets. Australian grass-fed beef is also exported to the US, as well as Asia. The EU produces limited amounts of grass fed beef, and exports grass-fed dairy beef to low income markets in Eastern Europe, Russia, and Africa. 10 CHAPTER 1 The World of Beef and its Markets
South American countries have long been prohibited from sending fresh/ chilled and frozen beef to the high-valued Asian and North American markets because of FMD. South America s major market has historically been the EU, which allowed imports of such product from FMD countries subject to specific standards. The re-emergence of FMD in early 2001 resulted in most countries, including the EU, banning imports of fresh/chilled and frozen product from South America. Domestic beef consumption As was shown in Figure 1, New Zealand consumes approximately 17% of the total beef it produces in the domestic market. This can be broken down to 54 and 46% for table and processing cuts respectively. Per capita beef consumption peaked in 1996/97 (Figure 12), but has declined each year since due to increasing prices. Poultry consumption has steadily increased since 1996/97. Sheep meat consumption declined from 1995/96 but recovered a little in the last two years. Figure 12: Domestic annual per capita meat consumption over the period 1991 to 2000. CHAPTER 1 The World of Beef and its Markets 11
Beef consumption relative to other proteins: recent trends From international studies, meat is winning the battle for share of stomach from vegetables. Meat consumption overall has grown at a faster rate than fish and vegetable consumption over the last decade. Both red and white meat volumes grew at compound annual growth rates of 1.3% during the period (0.9% for fish and vegetables). Red meat consumption has been driven by convenience and processed products. White meat has also grown by meeting consumer needs for convenience foods. Looking at the performance of the different meat types and between frozen and fresh, the following trends are evident in the last 5 years: Beef consumption has declined in the US, Germany and Netherlands, due (at least in part) to consumer concerns over beef following the 1996 UK BSE scare. In the UK itself, consumers switched back to beef following the BSE crisis; White meat consumption has increased in France, Germany, the UK and the US, the result of its comparatively low price and investment in product innovation (particularly in the areas of convenience of preparation and taste/variety); Pork has seen high growth during the period due to falling prices, demand for leaner meat and substitution for beef as a result of food safety scares; By value, growth rates for beef sold at retail have recently been negative in France, Germany and the Netherlands but were positive in the UK and the US. While fresh food still represents the vast majority of food sold at retail level, growth in frozen food is increasing, particularly in Germany and the US. Over the past 5 years, frozen meat sales have grown more rapidly than fresh (notably by 6.6% in the US), with manufacturers improving both presentation and convenience. The exception is the UK where retailers have focused on chilled foods, and frozen food has fallen in volume and value. Frozen foods are seen as more healthy in the US than in Europe (though food safety fears are expected to change this). Major factors driving consumers during the present 10 year period Major factors that currently drive changes in consumption in important food markets include the following: Food safety scares have seen widespread abandonment of afflicted foods consumer sensitivity on food safety issues remains at unprecedented levels and confidence in food producers is at an all time low. This is a bigger issue in Europe than the US. 12 CHAPTER 1 The World of Beef and its Markets
Convenience has been a major driver of food consumption, driving consumption away from loose, unprocessed meat, towards processed foods, added value items and meal solutions (quick, easy food). It is driven by people having less time, smaller households and declining cooking expertise. Health concerns have also seen consumers preferring leaner meats. At the same time, the trend has been compensatory eating eating healthy food alongside unhealthy food, rather than removing the latter from one s diet. Vegetarian foods have benefited from meat-related food scares and are increasingly being consumed by meat eaters. Further reading: Anon. 2002. Beef production outlook 2002-03. Paper No. C618. MWI Economic Service, Meat New Zealand, PO Box 121, Wellington. Anon. 2002. Meat and Wool Sector mid-season update, 20-02-03. MWI Economic Service, Meat New Zealand, PO Box 121, Wellington. Anon. 2002. New Season Outlook 2002-03. Paper No. G2223. MWI Economic Service, Meat New Zealand, PO Box 121, Wellington. Porter, P.; Beeby, N. 2001. The changing face of the New Zealand beef industry. Pp 1-8. Meat New Zealand, PO Box 121, Wellington USDA agricultural outlook website address: www.ers.usda.gov/publications/ agoutlook CHAPTER 1 The World of Beef and its Markets 13